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Mortgages: What to do if you're underwater

No one likes being underwater, which means you owe more on your house than what it could fetch on the market today. But so-called negative equity is not a problem in itself, unless you intend to sell your house.

If you're able to stay put in the home you're in, it's worth checking out if you qualify for federal refinancing programs. Look up your mortgage on MakingHomeAffordable.gov to see if the loan is owned by Fannie Mae or Freddie Mac. If you're current on your payments, you could be eligible for the Home Affordable Refinance Program. But be mindful that the program still remains out of reach for many homeowners who need the help.

In June, the Federal Housing Administration will implement new rules for refinancing existing FHA loans that were created prior to June 2009. That will make refinancing dramatically less expensive than under current rules, said Alex Stenback, a Twin Cities mortgage banker.

But life changes — a growing family, a divorce, or a new job in another city — may compel homeowners to move into a living situation that better fits their needs. For example, if you've recently lost your job and need to relocate to another part of the country to find work, you're faced with some grim options.

"Do you walk away from your home? Do you turn yourself into a landlord? Or do you turn down the job opportunity?" said Chris Farrell, economics editor of APM's "Marketplace Money."

Some underwater borrowers have chosen to rent out their homes and move into new ones, either to rent or own. This option is not for everybody. Managing a property is a huge responsibility, and it can amount to a lot of headaches. But it might make financial sense the borrower can afford to take on the risk, Stenback said.

"Even if you're losing a little money every month, you're bleeding slowly rather than all at once," he said. "The hope is that the home will at least come close to breaking even in the future. As the real-estate market recovers, maybe that property can be sold without having to write a monstrous check."

Then again, Stenback said, he has clients who have no desire to become landlords. They'll pay a large sum to the bank to cover their loss, sell the house, buy their next home, and move on with their lives, he said.

Short sales, in which the lender agrees to sell the house for less than what the borrower owes, remain yet another option for homeowners who need to move. But both short sales and foreclosures will damage your credit score. They may also prevent you from securing future financing on another home over the next three to seven years.

Walking away from a home still carries some stigma. But if you've lost your job, and you have an opportunity to get back to work in another state, some personal-finance experts say letting go of your house is a logical decision.

"That's a tougher set of circumstances, and then you need to look at your household as a business," Farrell said. "Sometimes you get yourself way in over your head, and you need to start again."